DFS Takes On OCC FinTech Charter

They say that the definition of insanity is doing the same thing over and over again and expecting a different result. In my own case, I don’t know if its insanity or stupidity that has lead me to spend decades of beautiful fall Sundays glued to my TV in the hope of watching both the Giants and Jets play good football in spite of the fact that this rarely ever happens. The Giants are starting 0-2 again and the Jets? Well, they are the Jets.

Conversely, even though the DFS had an earlier lawsuit seeking to block the approval of FinTech Charters by the Office of Comptroller of the Currency thrown out as premature, the DFS did the right thing Friday when it once-again sued the OCC for seeking to charter FinTech bank charters. This time the OCC has issued a draft licensing manual and the time seems to be ripe for the court to consider fundamental legal questions, the answer to which will radically reshape the landscape in which your credit union operates.

First, what is a FinTech charter? As conceived by the OCC, it is a non-depository federally chartered institution which pays checks or lends money. Specifically, 12 CFR 5.20(e)(1) has permitted the OCC to charter special purpose national banks that conduct one of three core banking activities: taking deposits, paying checks or lending money. The OCC anticipates that FinTech charters “will elect to demonstrate that they are engaged in paying checks or lending money.” (See Pg. 5 of the Controller’s Licensing Manual Draft Supplement)

So what has New York’s Department of Financial Services so upset? First, the definition of a FinTech could potentially cover virtually every institution with an app that does not accept deposits and as such is subject to state level licensing requirements. For example, check cashers don’t accept deposits and neither do money transmitters. In other words, from the perspective of state regulators, the FinTech charter amounts to nothing less than a federal power grab which would largely make them obsolete.

Second, consumer advocates and state regulators argue that this new charter will provide a means to allow institutions to circumvent state level consumer protection laws. For example, in its complaint, the DFS argues that approval of a FinTech charter could lead “in New York to the proliferation of prohibited payday lending by out-upstate OCC chartered entities seeking to import their usurious trade into the state to exploit the financially vulnerable” because it would give them a means to easily circumvent the state’s interest rate cap.

But as these policy issues get debated, the actual issue to be considered in this lawsuit is a straight forward one: does the OCC, which is empowered under the National Bank Act to charter and oversee national banks, have the authority to extend its charter to non-depository institutions so long as they engage in other core banking activities? In other words, what is a bank? Does anyone really know what time it is? Does anyone really care? Just wanted to see if you’re still paying attention.

Do credit unions have a stake in this fight? You bet they do. The competitive pressures that the industry faces are already enormous. But can you imagine how those pressures are going to grow if you suddenly find yourself competing directly against Facebook and Apple with immense capital at their disposal? It gets even worse when you consider that these institutions will not be subject to capital requirements similar to your credit union’s – because they won’t take deposits – or a fraction of the consumer protection laws which make your life so much fun.